The Philippine banking sector targets boosting financial inclusion among small businesses

With strong capitalisation and credit growth on the back of robust GDP figures and falling inflation, the Philippine banking sector now faces a year in which consolidation of gains and expansion into new demographics are clearly on the agenda. The country continues to be well served by a variety of lenders, with universal and commercial banks supplemented by a wide array of thrift banks, rural and cooperative banks, and other microfinance institutions.

Innovations in financial technology (fintech) are bringing banking to many more Filipinos via technological devices, while acting as a disruptor to traditional banking methods. There is increasing focus placed on the country’s smaller lenders as they gradually embrace fintech in a bid to extend their reach to unbanked and underbanked populations.

Challenges still remain, however, such as the move towards stronger, risk-based capital rules, which requires higher levels of digitalisation. Expanding banking activity beyond the corporate sector to fund more household demand is also a key challenge for the period ahead, while a strengthening of know-your-client (KYC) tools and regulations requires careful management. Nevertheless, the sector is poised for further growth, with government development plans in particular opening up a range of new financing opportunities.

Regulatory Oversight 

The main institution responsible for the banking sector is Bangko Sentral ng Pilipinas (BSP), the central bank. The BSP was established as an independent monetary authority in 1993 via the enactment of the New Central Bank Act. The BSP is headed by its governor, who is tasked with directing and supervising the operations and internal administration of the central bank, and there are four deputy governors responsible for different functions of the authority. In March 2019 President Rodrigo Duterte appointed Benjamin Diokno, the former secretary of budget and management, as governor of the BSP following the death of the previous governor, Nestor Espenilla Jr.

Under the New Central Bank Act, the BSP’s Monetary Board, which consists of seven members appointed by the president, is the key authority for setting rates and other monetary policy targets. One of the board’s members must be a Cabinet minister, and that post is currently held by Carlos Dominguez III, the secretary of finance.

The BSP’s four sectors comprise: the Financial Supervision Sector, which is directly responsible for the banking sector, fintech and other non-banking financial institutions; the Monetary and Economics Sector, in charge of the country’s monetary policy; the Currency Management Sector, which oversees physical currency; and the Corporate Services Sector which runs both the BSP’s human resources and communications strategies.

The BSP also enforces the Financial Consumer Protection Framework, which covers the minimum requirements for protection of client information, fair treatment of customers, disclosure and transparency, financial education and customer recourse.

Asean Integration 

The BSP is a lead agency in the closer integration of the 10 ASEAN member states’ financial sectors. Under the ASEAN Banking Integration Framework, to be finalised by 2020, Qualified ASEAN Banks (QABs) that meet certain criteria will be authorised to operate across the region. The BSP concluded negotiations with the Malaysian central bank on guidelines covering QABs between these two states, while negotiations with the Thai and Indonesian banking authorities are in progress.

The regularisation of banking methods and systems across the member states is the short-term goal, which would allow both financial sector individuals and institutions more immediate accessibility across each of the ASEAN markets. While banking integration in the region may be a developing prospect for the Philippines in the long term, the priority of the country for the time being remains squarely on increasing the level of financial inclusion among its some 107.4m inhabitants.

Key Agencies 

Beyond the central bank, another key institution is the Philippine Deposit Insurance Corporation (PDIC), which is attached to the Department of Finance (DoF) and insures bank deposits of up to P500,000 ($9300). In addition, the PDIC conducts depositor education and other financial literacy programmes, such as the “Be a Wise Saver” campaign, while also collecting data on the extent of deposits held by the nation’s banks. The PDIC may also conduct an examination of a bank, provided it has the permission of the BSP and has not done a similar inspection within the previous 12 months.

The National Economic and Development Authority is the prime mover in government development plans, and it coordinates a variety of ministries and agencies in the drawing up and implementation of similar programmes and projects. Meanwhile, the DoF is primarily responsible for the country’s fiscal policy formulation and administration. Local government finance, and the privatisation and management of government assets are overseen by the DoF-attached Bureau of Local Government Finance, and the Privatisation and Management Office, respectively.

The Bankers Association of the Philippines, the Chamber of Thrift Banks, the Rural Bankers Association of the Philippines and the Trust Officers Association of the Philippines represent and lobby on behalf of the interests of their respective members, and are formally recognised by the central bank.


The banking sector is usually divided into universal and commercial banks (UCBs), thrift banks (TBs), rural and cooperative banks (RCBs), and Islamic banks. TBs include savings and mortgage banks, stock savings and loans associations, and private development banks. The Manual of Regulations for Banks, which is issued and updated by the BSP, implements the broader provision of the General Banking Law of 2000. In addition to this, each nonUCB segment also has its own particular regulations, with these being the Thrift Banks Act of 1995, the Rural Banks Act of 1992, the Philippine Cooperative Code of 2008 and the Charter of Al Amanah Islamic Investment Bank of the Philippines (AAIIBP).


Based on preliminary data as of end-May 2019, there were 1192 non-bank financial institutions (NBFIs) without quasi-banking function, 563 banks and nine NBFIs with quasi-banking function. Moreover, as of early June 2019 there were 37 TBs and 150 RCBs authorised to accept demand deposits, while 24 UCBs and six TBs had trust authority.

BSP figures show that the total assets of the banking sector stood at P17trn ($316.2bn) in March 2019, up 9.8% from P15.3trn ($284.6bn) in March 2018. Over the same period assets from UCBs rose from P13.9trn ($258.5bn) to P15.5trn ($288.3bn), equating to 91% of total sector assets, while assets from TBs increased from P1.2trn ($22.3bn) to P1.3trn ($24.1bn). The most recent data available for RCBs was for March 2019, when recorded assets hit P251bn ($4.7bn), up from P236bn ($4.4bn) in March 2018. The sector’s net profit at the end of March 2019 stood at P54.6bn ($1bn), compared to P44.4bn ($825.8m) recorded at the same period of the previous year, signifying an increase of around 23%.

In terms of asset quality, the net non-performing loan (NPL) ratio stood at 1.07% at end-March 2019, up from the end-March 2018 ratio of 0.87%. When looking at the UCB segment alone, the net NPL ratio is significantly lower, increasing from 0.51% to 0.67% over the 12 months. The sector’s gross NPL ratio – which does not deduct specific allowance for credit losses on NPLs – increased from 1.84% in March 2018 to 2.06% in March 2019. Meanwhile, the NPL coverage ratio remained more than adequate, despite a decline from 119.69% to 95.68%.

Return on assets, reported quarterly by the BSP, fell from 1.19% in the first quarter of 2018 to 1.17% in the same period of 2019. Return on equity also fell, from 10.1% to 9.6% over the same period.

The banking sector is robust in terms of liquidity, with BSP figures showing a gross loans-to-deposits ratio of 78.68% in March 2019, up from 75.21% the same month of the previous year. Liquidity is expected to continue increasing as a result of the reduction of the reserve requirement ratio (RRR). The RRR for UCBs and TBs was reduced by 100 basis points on May 31, 2019 and by 50 basis points on June 28, 2019. A further cut of 50 basis points is expected on July 26, 2019, which would bring the RRR level down to 16% for UCBs and 6% for TBs.

Industry Players 

At the end of 2018 BDO Unibank was the biggest UCB in terms of assets, with P2.89trn ($53.8bn), followed by Metropolitan Bank and Trust (Metrobank) at P1.89trn ($35.2bn), the state-owned Land Bank of the Philippines at P1.88trn ($35bn), the Bank of the Philippine Islands (BPI) at P1.82trn ($33.9bn), the Philippine National Bank at P909.67bn ($16.9bn), and China Bank at P773.48bn ($14.4bn). Together, these top-six UCBs accounted for about two-thirds of the segment’s total assets, which stood at P15.4trn ($286.4bn) at end-2018.

Rounding out the top-10 banks in terms of asset size were Security Bank, with P770bn ($14.3bn); the state-owned Development Bank of the Philippines (DBP), with P669.4bn ($12.5bn); the Union Bank of the Philippines, with P597.9bn ($11.1bn); and the Rizal Commercial Banking (RCBC), with P517.8bn ($9.6bn). The top-10 UCBs accounted for 82.5% of the segment’s total assets, or 75.2% of the entire banking sector’s assets, as of the end of 2018.

Meanwhile, the five biggest TBs in terms of assets at the end of 2018 were the BPI Family Savings Bank (BFSB), with assets of P271.5bn ($5bn); Phil Savings Bank (PSB ank), with P236.8bn ($4.4bn); the RCBC Savings Bank, with P139.9bn ($2.6bn); China Bank Savings, with P96.8bn ($1.8bn); and the Philippine Business Bank, with P94.6bn ($1.8bn). As their names suggest, a number of the TBs are the savings arms of UCBs; BFSB, for example, is a wholly owned subsidiary of BPI, while PSB ank is a subsidiary of Metrobank.

Islamic Banking 

Within the UCB segment is the country’s only Islamic bank, the AAIIBP, which had total assets of P797.3m ($14.8m) at end-2018. Established in 1973, it was one of the world’s first Islamic banks, mandated to provide services in regions with large Muslim populations. The bank is a subsidiary of the DBP, which hopes to expand its services in the newly instated Bangsamoro Autonomous Region in Muslim Mindanao (BARMM). One impediment to further growth in the Islamic banking segment was the lack of a specific Islamic banking law and regulatory framework. In early June 2019, however, Senate Bill No. 2105, also known as An Act Providing for the Regulation and Organisation of Islamic Banks, was approved by the Senate on the third reading and was pending President Duterte’s signature as of August 2019. This followed the approval of the counterpart House Bill No. 8281 by the House of Representatives in November 2018. The principles of the Islamic banking bill include allowing conventional banks to operate Islamic banking windows or units; providing linkages, including inter-bank markets, that cater to Islamic banking; encouraging a level playing field where Islamic banking can operate alongside conventional banking; promoting innovative products and services; and raising investor awareness, while ensuring consumer protection.

While the bill awaits presidential approval, there have been other signs that indicate potential segment growth in the near term. According to local media in April 2019, several foreign Islamic banks showed an interest in opening up operations in the Philippines, including Malaysia’s CIMB Islamic and City Credit Investment Bank, and Qatar Bank.


While the sector expanded in 2018, a major headwind that inhibited more robust growth that year – and a likely contributor to the rise in NPLs – was inflation. This metric grew steadily over the year, beginning at 3.4% in January before climbing to a high of 6.7% in September and October, and falling to 5.1% in December. These levels were above the BSP’s upper-limit target of 4% and the highest seen in over nine years. Factors that drove inflation included a rise in global oil prices around mid-2018 and a decline in the value of the peso, which drove up the price of imports. The latter hit a 12-year low of P53.3:$1 in June 2018, although it recovered slightly to end the year at P52.5:$1 before continuing to improve to P52.4:$1 as of mid-May 2019.

A shortage of subsidised rice also put upward pressure on prices, and double-digit increases for were recorded in certain regions, such as Bicol, where prices were up 12.5% in August. Measures to tackle this were introduced, including a tariff-based system rather than a quantitative one for rice imported into the Philippines’ strictly controlled domestic rice market (see Agriculture chapter).

To bring prices under control, the BSP embarked on a major series of interest rate hikes in the second of the year. Between May and November 2018 the central bank increased its key policy rate by 175 basis points. The final adjustment brought the overnight reverse repurchase (RRP) facility to 4.75%, which was maintained through to December.

Inflation averaged 3.8% in the first quarter of 2018 before falling to 3% in April 2019, well within the BSP’s target band of 2-4%. This allowed for an easing of interest rates throughout 2019, with the initial cut of 25 basis points in May. In spite of this, inflation dropped further, to a two-year low of 2.4% in July 2019, which led the BSP to further trim rates by another 25 basis points in August. Another two cuts of 25 basis points each are expected by the end of 2019. At the same time, however, the BSP will be maintaining a watchful eye on the effect of the El Niño climate cycle on agriculture prices.

Deposits & Loans 

BSP figures show that the banking sector recorded P12.7trn ($236.2bn) in deposit liabilities in March 2019. This broke down into P10.6trn ($197.2bn) in peso liabilities and P2.1trn ($39.1bn) in foreign currency liabilities. In March 2018 total deposits reached P12trn ($223.2bn), indicating year-on-year growth of 6.1%. Total liabilities also rose, from P13.5trn ($251.1bn) to P14.9trn ($277.1bn) over the same period, representing an increase of approximately 9.9%.

Other data indicators were also largely positive. The sector’s gross total loan portfolio increased from P9trn ($167.4bn) to P10trn ($186bn) over the 12 months, up 11%. Consumer loans totalled P1.7trn ($31.6bn) in March 2019, with the largest segments being in residential real estate loans, with P690.9bn ($12.9bn); motor vehicle loans, accounting for P533.3bn ($9.9bn); and credit card receivables, making up P302.4bn ($5.6bn).

Loans to residents for production purposes rose from P7.1trn ($132.1bn) in March 2018 to P8trn ($148.8bn) in March 2019, while loans for household purposes increased from P955.1bn ($17.8bn) to P1.1trn ($20.5bn) over the same period. Non-resident production and household loans added P287.8bn ($5.4bn) to the total in March 2019 compared to P261.8bn ($4.9bn) in March 2018.

Capital Adequacy Ratio 

Capital adequacy ratios (CARs) are set by the BSP on the basis of a given bank’s size and type. The Basel III framework applies to UCBs, while TBs and RCBs fall under Basel II rules. Domestic systemically important banks (D-SIBs) are required to submit recovery plans to the BSP, which has the power to prevent any voluntary dissolution or liquidation of a bank. Since 2017 the D-SIBs have also been required to build up higher loss absorbency levels, which vary from 1.5% to 2.5% of additional common equity Tier-1 capital depending on their type, with these levels to be achieved by end-2019.

Given that the Basel III standards require a minimum CAR of 10.5% of qualifying capital to risk-based assets, the D-SIBs – and most other Philippine banks – have had little difficulty in meeting these standards. Following the 1997-98 Asian financial crisis, Philippine banks were greatly revamped, with much more stringent requirements for capital adequacy. As of end-December 2018 the average CAR of UCBs on a consolidated basis stood at 15.4%, with this figure above 15% every year for the last decade. A potential lowering of this ratio may be seen in the future as banks seek to take on a larger role in financing the country’s economic development plans. Under the BSP’s Circular No. 781 of 2013, the regulatory minimum CAR is set at 10%. The phased-in implementation of the minimum liquidity coverage ratio (LCR) under Circular No. 1035 of 2019 subjects UCBs to an LCR floor of 90%, effective January 1, 2018, and 100%, effective January 1, 2019. Meanwhile, the minimum LCR of subsidiary banks or quasi-banks of UCBs shall be 100% effective January 1, 2020.

Market Penetration 

The BSP’s 2017 Financial Inclusion Survey – the most recent one available – showed that some 77.4% of the adult population – or 52.8m people – remain unbanked. The 22.6% with a bank account – up marginally on the 22% recorded in 2015 – can be broken down according to type of provider: formal banks (11.5%), non-government microfinance institutions (8.1%), cooperatives (2.9%), and non-stock savings and loans associations (0.3%). Thus, given the potential of an under-tapped market, an area of increasing focus in terms of expanding the sector is growing the client base, both in terms of individuals and businesses, particularly micro-, small and medium-sized enterprises (MSMEs). This group constituted some 99.56% of all business enterprises operating in the Philippines in 2017, the most recent year for which data was available from the Department of Trade and Industry.

Under Republic Act No. 9501, also known as the Magna Carta for MSMEs, banks are required to set aside at least 8% of their loan portfolios for micro and small enterprises, and 2% for medium-sized enterprises. However, according to the latest available figures from the BSP, the average ratio among all banks was 3.12% for micro- and small enterprises in December 2018, while UCBs recorded 2.53% and TBs 4.9%. Only RCBs exceeded the minimum ratio, with 24%. The ratio for lending to medium-sized firms was much better, with all bank types exceeding requirements: UCBs recorded 4.39%; TBs 5.01%; and RCBs, 10.62%. Overall, the sector averaged 4.55%.

Similarly, under Republic Act 10000, also known as An Act Providing for an Agriculture and Agrarian Reform Credit and Financing System Through Banking Institutions, banks are also required to allot at least 10% of their loanable funds to agrarian reform beneficiaries (agra), and 15% to farmers and fishers (agri). This mandate, however, has also not been fulfilled, with December 2018 BSP figures showing an average of 1.17% of banks’ loans going to agra and 13.08% to agri. Consequently, banks paid some P6bn ($111.6m) in penalties over the 2016-18 period due to failures to comply, Bruce Tolentino, a member of the Monetary Board, told local media in December 2018, adding that banks preferred paying these fines to lending to high-risk farmers and fishers.

Barriers to Credit 

Indeed, extending loans to micro- and small businesses is often complicated by a lack of financial information about the business, along with their lack of collateral. Regarding the former, recent moves to enable strengthened KYC tools may help. “The introduction of the national ID is very positive for the banking sector,” Helen Dee, chairperson of RCBC Bank, told OBG. Expected to roll out in 2019, the $563m project aims to issue the entire population with biometric cards by 2022 (see analysis). Dee added that the cards “will remove barriers to opening a bank account related to compliance and documentation, and it will also facilitate the integration of MSMEs into the banking system”.

While there are barriers to credit for small business owners, a handful of the conglomerates that dominate the Philippine economy have an easier time accessing loans, due in part to the fact that many of them feature banks in their business portfolios. In terms of the lack of collateral, this continues to be an issue in low- and lower-middle-income developing economies. One way in which to overcome this obstacle is by helping retail customers move gradually towards obtaining real estate that they can then use to secure further credit.

“Personal loans today are used for the acquisition of land and real estate investments,” Roberto de Ocampo, president of Philippine Veterans Bank, told OBG. “The strategy to increase penetration in the retail segment is to use those properties as collateral.”

Though it will take some time to execute these moves, returns are expected in the long run, bringing more businesses and individuals into the banking system. Meanwhile, advances in fintech may help boost penetration rates further (see analysis).

Financial Inclusion 

In 2017 the administration of President Duterte unveiled its Philippine Development Plan (PDP) 2017-22, which aims to greatly improve the country’s infrastructure. Among its key objectives, the PDP seeks to promote a more inclusive financial sector. The PDP acknowledges that, “Despite widening networks, there are persistent geographical, human, institutional and infrastructure-related barriers to accessing financial services.” These infrastructure barriers refer to the proximity and accessibility of bank branches and facilities in a republic of over 7000 islands, while the human-related obstacles include limited financial literacy among some sections of the population.

Financial infrastructure itself is highly concentrated in major metropolitan areas – particularly Metro Manila – although other cities, such as Cebu and Davao, have also developed quickly during recent years. BSP data for December 2018 shows that there were 3739 banking offices in the National Capital Region out of a national total of 12,316, with the region accounting for about 30% of banking offices nationwide. Calabarzon had the second-highest number of banking offices, at 1825, followed by Central Luzon, with 1286. The most underbanked regions in terms of physical infrastructure included the BARMM, with 19 banking offices; Cordillera Administrative Region, with 186; Caraga, with 216; and the Zamboanga Peninsula, with 238. Moreover, credit becomes more difficult to access the further away a business is from Metro Manila, as companies in cities like Davao or Cebu need to travel to Metro Manila in order to get a bank loan.

In terms of the numbers of ATMs and banks offering e-banking facilities, BSP data shows that as of December 2018 there was a total of 18,419 ATMs belonging to UCBs nationwide, plus 2280 belonging to TBs and 579 belonging to RCBs. Some 41 UCBs, 25 TBs and 16 RCBs offered e-banking. The BSP’s decision to lift a moratorium on adjustments to ATM fees in July 2019 caused concern about higher charges for cardholders; however, the BSP reassured the public that banks will not be allowed to hike ATM fees without first filing a request to the central bank.

One way in which the banking sector hopes to increase its accessibility and broaden its distribution of services beyond major metropolitan areas is via online banking. In order for this to be successful, however, further investment in network infrastructure – especially in the more remote rural areas – is needed. Such efforts to boost internet connectivity are already under way, with recent developments signalling that financial inclusion remains high on the government’s agenda. In March 2019 the Department of Information and Communications Technology announced that it is partnering with the UN Development Programme to help advance the Free Wi-Fi Internet Access in Public Places Project, which was launched by the now-defunct Information and Communications Technology Office of the Department of Science and Technology in 2015 as part of the Philippine Digital Strategy 2011-16.


The year 2019 is expected to be another strong one for the banking sector, with profit and credit growth likely to continue their upwards trajectory as the economy expands and inflationary pressures ease. Corporate loan growth in particular may see an increase as the government’s infrastructure plan injects greater vitality into the economy. Increased sector activity is expected, as the BSP rolled out RRR and interest rate cuts in the first eight months of 2019, with two more interest rate cuts of 25 basis points each expected by the year’s end.

Meanwhile, efforts to boost inclusion will continue, with banks and non-traditional banks looking to roll out more e-solutions to access previously underbanked regions. A huge potential market remains largely untapped in the Philippines’ rural yet fast-urbanising territories, which could be accessed with the help of fintech. Given the high number of financial institutions in the country, collaboration between UCBs, RCBs and TBs may be on the cards, along with mergers and acquisitions, with moves towards consolidation expected to further strengthen the sector.

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The Report: Philippines 2019

Banking chapter from The Report: Philippines 2019

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